Money and the Monetary System Flashcards
The stated purpose of the Federal Reserve is
to maintain a sound banking system and a strong economy for the nation
The Fed is responsible for controlling the flow of money into and out of the economy. There are three primary ways this is accomplished:
Manipulating interest rates.
Changing reserve requirements.
Selling securities.
The basic functions of the Department of the Treasury include:
Managing Federal finances;
Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.;
Currency and coinage;
Managing Government accounts and the public debt;
Supervising national banks and thrift institutions;
Advising on domestic and international financial, monetary, economic, trade and tax policy;
Enforcing Federal finance and tax laws;
Investigating and prosecuting tax evaders, counterfeiters, and forgers.
The Department of the Treasury is organized into two major components
the Departmental offices and the operating bureaus
The Office of the Comptroller of the Currency (OCC) was established in 1863 as a bureau of the U.S. Treasury
In overseeing national bank operations, the OCC has the power to:
Examine the banks.
Award or reject applications for new charters, branches, capital, or other changes in corporate or banking structure.
Take managerial actions against banks that do not comply with laws and regulations or that otherwise engage in unsound banking practices. The agency can remove officers and directors, negotiate agreements to modify banking practices, and issue cease and desist orders as well as civil money penalties.
Issue rules and regulations governing bank investments, lending, and other practices.
Federal Deposit Insurance Corporation (FDIC)
The FDIC has three major activities:
It insures bank and thrift institution deposits for at least $250,000.
It identifies, monitors, and addresses risks to the deposit insurance funds.
It limits the effect a bank or thrift institution failure has on our nation’s economy and the financial system.
The FDIC covers
Checking accounts
Negotiable Order of Withdrawal (NOW) accounts
Savings accounts
Money Market Deposit Accounts (MMDAs)
Time deposits such as certificates of deposit (CDs)
Cashier’s checks, money orders, and other official items issued by a bank
The FDIC does not cover
Stock investments Bond investments Mutual funds Life insurance policies Annuities Municipal securities Safe deposit boxes or their contents U.S. Treasury bills, bonds or notes
A bank failure is the
closing of a bank by a federal or state banking regulatory agency, generally resulting from a bank’s inability to meet its obligations to depositors and others. In the unlikely event of a bank failure, the FDIC acts quickly to ensure depositors get prompt access to their insured deposits.
The FDIC acts in two capacities following a bank failure:
As the “Insurer” of the bank’s deposits, the FDIC pays deposit insurance to the depositors up to the insurance limit.
As the “Receiver” of the failed bank, the FDIC assumes the task of collecting and selling the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit.
the Federal Home Loan Bank System (FHLB)
was structured in 1932 to bring stability to savings and loan associations and to renew the public’s confidence in these associations. Its mission was to establish rules and regulations for the member savings associations.
Organized like the Fed, the FHLB has 12 federal home loan district banks, charged with improving the supply of funds to local lenders that finance loans for home mortgages
The Federal Housing Finance Board regulates the 12 district banks. The board also has regulatory authority and supervisory oversight responsibility for the Office of Finance.
The Finance Board sees to it that:
The privately-capitalized, government-sponsored banks in the system operate in a safe and sound manner.
The banks carry out their housing and community development finance goals.
The banks maintain sufficient funds.
The banks are capable of raising funds in capital markets.
To implement its primary task of controlling money supply, there are three main tools the Fed uses to change bank reserves:
A change in reserve requirements
A change in the discount rate
Open-market operations
When a bank’s reserves are in danger of slipping below the minimum, the bank can approach another bank with excess reserves and borrow money on a short-term basis
The interest rate that Bank A will pay to Bank B for use of the funds is the federal funds rate. Most of these loans from one bank to another are overnight loans.
